BRUSSELS – The euro currency union, which just 18 months ago appeared on the verge of collapse, is welcoming a new member. But while officials will hail that as more proof that the bloc is here to stay, the economy still faces a list of economic ills — sluggish growth, high unemployment and growing inequality.
Effective New Year’s Day, Latvia becomes the eurozone’s 18th member. With only 2 million people, the country on the Baltic Sea can’t move the economic needle much. Its acceptance into the euro club mainly represents a political boost for a currency that is only 12 years old and finding its feet after a vicious financial crisis.
The eurozone, proclaimed EU Commission President Jose Manuel Barroso, is “stable, attractive and open to new members.”
What lies ahead for the euro economies in the coming year and beyond? Here are a half-dozen questions, and statistics and assessments to help answer them.
Q. Is the eurozone’s economy on a sustainable recovery?
A. The bloc formally emerged from recession in the second quarter by growing a timid 0.3 per cent. Since then, however, it has hardly expanded at all. The European Commission, the EU’s executive branch, expects only 1.1 per cent growth in the coming year.
But after 2013, even that would be an improvement.
Q. Will the recovery help everybody?
A. No. Olli Rehn, the EU’s economic commissioner, has acknowledged that economic conditions will remain “painful” for many Europeans. And a recent EU report said far from there being a convergence in European living standards, one of the rationales for the euro’s creation, there actually has been a “growing divergence” during the past five years.
Household incomes have risen in northern and central countries of the eurozone, while dropping by about 10 per cent overall in the weaker economies, most of which are in the south.
What’s more, according to the report, income inequality is climbing inside individual member states, and the poverty rate is increasing in some.
Q. What about unemployment?
A. It remains high, at 12.1 per cent in the euro countries overall, according to official statistics. In Greece and Spain, it was over 25 per cent in the closing months of 2013.
Figures for youth joblessness were even worse: in Greece and Spain, over half of the people between 15 and 24 years of age who are seeking employment can’t find it.
“The recovery we are seeing is still very fragile,” EU social affairs commissioner Laszlo Andor has said. “The EU economy is still far from creating enough job opportunities, and millions of people who want to work simply do not get the chance.”
Q. Is the era of bailouts to European governments over?
A. Perhaps, perhaps not. Ireland last month became the first eurozone country to exit from a bailout, an event feted by EU finance ministers when they met in Brussels.
But Greece may need help managing the huge amount of rescue loans it is receiving as part of its 240 billion-euro ($330 billion) bailout program with the EU and International Monetary Fund. The IMF says fellow eurozone countries should allow Greece to write off some of those loans or lower their interest rates again. Both options would be tantamount to more financial aid, as they would cost taxpayers in the eurozone.
Portugal, whose three-year bailout is supposed to wrap up this year, also may need more assistance.
Q. Will bank failures cause more trouble for eurozone countries?
A. EU authorities are trying to reduce concern over the financial sector, but have been moving slowly.
Last month, leaders agreed on the broad outline of a eurozone-wide mechanism designed to refloat or close failing banks. A major goal is to prevent an insolvent bank from dragging down a national government with it. But many analysts worry the solution arrived at is too complicated to work in real time, and won’t be generously funded enough to cope with a major banking crisis. What’s more, a lot of fine print remains to be written, and the European Parliament still must approve the plan.
The European Central Bank, meanwhile, will begin in 2014 a year-long review of the eurozone’s biggest banks. It aims to identify and fix the weak spots in banks’ balance sheets. The hope is that will reduce uncertainty in the financial system and encourage banks to lend more, a prerequisite for stronger economic growth.
Q. Will the eurozone keep expanding?
A. Latvia’s neighbour Lithuania is on track to follow it into the eurozone a year from now, on Jan. 1, 2015.
After that, the future becomes murky.
All 28 EU countries are required by treaty to adopt the euro except Britain and Denmark, both of which negotiated and obtained explicit exemptions.
Sweden has remained outside by purposefully not meeting the budgetary and monetary requirements. Swedish voters rejected the euro in a 2003 referendum.
In spite of Barroso’s invitation to “new members,” the other EU countries eligible for eurozone membership have yet to take the formal steps necessary to apply.